This bug still seems to be present (at least testing with 12.10).

The best workaround seems to be:

1. Set permissions of /root to 0711 in the firstboot script.
2. Reset the permissions of /root to 0700 at the end of the firstboot script.

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https://bugs.launchpad.net/bugs/378639

Title:
  firstlogin script can't be executed because the permission of /root
  directory is 0700 in the virtual machine created by python-vm-builder

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